Homeowners starting over

Unfortunately, once a foreclosure or bankruptcy is final, the financial and emotional upheaval is far from over. While there's considerable pain, most foreclosure victims will eventually become homeowners again, according to Jay Zagorsky, a research scientist at The Ohio State University.

Still, that won't happen anytime soon, especially since mortgage rule maker Fannie Mae has recently lengthened the time that must lapse between a foreclosure and approval for a new mortgage.

Here's a look at the issues foreclosed families grapple with, and some smart solutions.

Finding a New Home

The immediate problem is obvious: where and how to find a new place to live.

[Article continues below]

Lack of cash for a rental deposit is probably the biggest barrier to getting re-established. Landlords will sometimes accept tenants who have a lower credit score. But if landlords look beyond the credit score, a foreclosure may spook them, since it indicates the potential tenant has not paid their housing bills.

If the foreclosure can be explained and if the rental candidate has a solid job history, they may be accepted. However, if you are on the edge of the landlord's specifications, you may have to double your deposit. Scrapping together a rental deposit isn't easy.

That's why I recommend that people try to make plans as soon as they think foreclosure is inevitable. Anyone who has an FHA-insured loan should investigate the "cash for keys" program, where they get a check for up to $1,000 if they voluntarily vacate and leave their home "broom clean."

Some lenders may allow you to stay in the property if you cooperate while the lender is trying to sell the house, which can take six months to a year or more. You must agree to pay the utilities on time, keep the property clean and neat and make the property available for showings when requested.

This program allows you to save money for when you do have to move out. The lender will usually give you 30 days or more written notice prior to your having to vacate the property. By this time you will have saved substantial money to move and for a deposit.

[Article continues below]

Credit

Always pay your rent with a check, never cash or a money order. You will need to produce a couple of years of rent checks to prove your rent has been paid on time in order to obtain a mortgage.

Credit cards are a must to anyone building new or rebuilding credit. To raise your credit score after a bankruptcy or foreclosure you will need at least one credit card. Ask a bank or credit union if they offer a secured credit card.

A secured credit card is where a predetermined amount of money, usually $250 to $500, is deposited with the lender. This money stays on deposit to secure the credit card. This secured card is not reported to the credit bureau as secured; it shows as a normal use of credit.

Credit cards have a default rate (the highest rate the lender can charge based on their opinion of risk), so you could see your interest jump substantially, as much as 30 percent.

Your mail always has offers for credit. Immediately shred those forms. Don't open a credit card from a telephone offer.

After a bankruptcy or foreclosure, once you have acquired credit never ever pay a bill late.

You will also have a hard time getting a decent car loan. After you have a discharged bankruptcy the lender knows you cannot file for bankruptcy again anytime soon and that could make it easier to acquire an auto loan (installment loan). Whether you have a new or existing loan, be sure to always pay the loan on time every month

Employment Loss

If you lost your job as well as your house, in general your new job hunt should not be hindered by the subject of your foreclosure coming up in job interviews -- unless you are applying for a job in which you handle money. In any case, you should have an explanation ready, perhaps describing how the foreclosure has changed some of your personal money management skills, suggests John Ulzheimer, president of consumer education for SmartCredit.com.

Taxes

You lose your home and then weeks or months later you open your mail and find a bill from the IRS for the taxes on the amount of mortgage that the lender was not able to recover from the sale of the property. Anytime debt is forgiven, it's a potentially taxable event.

You are not paying back money that you borrowed, so what seems to be the ultimate injustice is that money is considered income by the IRS. An existing tax law exemption for your situation expires on Dec. 31, and extending this tax law is the goal of the National Association of Realtors.

The National Association of Realtors has called upon all Realtor members to contact their House and Senate members to urge that the tax laws be extended. It's imperative that the current legislation does not expire exempting the forgiven debt from being subject to income tax. The public experiencing the loss of their homes from foreclosure are suffering enough; no need to compound the pain with additional taxes.

New Home

Can you buy another home after a bankruptcy or foreclosure? The answer is yes. However, the waiting periods required for significant derogatory credit events vary by the type of loan you will need to purchase. During this waiting period, you will work to re-establish your credit and create a reserve account.

Just because you qualify to purchase a new home, do not rush into homeownership. Take the time to establish a reserve account first. This means you should save sufficient money equal to at least six months of potential house payments and utilities. You may have to continue renting another six months or a year to accomplish this goal, but you will then have peace of mind that your emergency fund or reserve account is available to protect you in the future. With your reserve account established, it's now time to call your Realtor for assistance in obtaining a preapproved loan so you can select your new home.

The following guidelines are for informational purposes only and to be used only as a guide in planning for your future home purchase. Contact a lender; don't assume. The new mortgage granted will be for a primary residence only.

Conventional loans after foreclosure require a waiting period of seven years from the date the home was transferred back to the bank if there are no extenuating circumstances. With extenuating circumstances the waiting period is three years and a 10 percent down payment.

Short sales have varying wait times of two, four and seven years with a 10 percent down payment (extenuating circumstances) or 20 percent down payment (no extenuating circumstances).

FHA loans have wait times of two to three years with re-established credit and a letter of explanation for the foreclosure, short sale or bankruptcy. There are numerous rules for a new mortgage after a short sale, foreclosure and bankruptcy chapters 7 and 13.

VA is similar to FHA with the exception that after a 12- to 23-month waiting period, and if credit has been re-established and paid as agreed, a new mortgage may be granted. After a short sale there is no waiting period if the veteran borrower had no late payments on any mortgages and consumer debts within the 12 months preceding the short sale and they are not taking advantage of declining markets conditions.

USDA is similar to VA and FHA regulations.

I hope this information helps you plan for a brighter future knowing that homeownership is possible.

The mission of the Stark County Association of Realtors is to enhance the ability and opportunity of its members to conduct their business successfully and ethically and to promote the preservation of your right to own, use and transfer real property.

Keep in mind, legal questions regarding real estate should be directed to an attorney.

Visit the association's website at www.starkrealtors.com for additional information. Don't hesitate to email me at president@starkrealtors.com with your comments, questions or suggestions for these articles.